Investment products are often tailored to address the investment goals of investors. Investors may have concerns related to a loss of principal investment due to market returns and volatility, having the ability to increase income, and ensuring an adequate amount of retirement savings and not outliving their income. In the past, a retiree typically relied on employer pension plans and Social Security to meet these concerns. However, these traditional sources of retirement income may no longer be sufficient to satisfy these concerns.
Investment product issuers derive revenue by selling the products to investors and charging fees associated with the products. However, investment products that provide guarantees to an investor regarding the value, benefits or payments of the investment product are also a source of financial risk to the investment product issuers. To manage and mitigate this financial risk, an issuer typically offers the financial product subject to special rules and fees that are incorporated into the financial product through an agreement with the investor. Such agreements can be a legal contract, product terms and conditions, a rider to a contract, a certificate, etc.
For example, an annuity is a contract in which an investor makes a lump-sum payment or series of payments in exchange for periodic payments that begin either immediately or at some future date. In general, two types of annuities exist, a fixed annuity and a variable annuity. A fixed annuity is designed such that the investor earns on a tax deferred basis a minimum guaranteed rate of interest, plus any discretionary higher rate, during the time that the investor's account is growing. Periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as the lifetime of the investor, or the lifetimes of the investor and the spouse of the investor. In contrast, in a variable annuity, an investor may elect to invest in a range of different investment options, typically either in a fixed option (similar to a fixed annuity), or in underlying funds (similar to mutual funds). The rate of return on the variable annuity and the amount of the periodic payments to be paid often varies depending on the performance of the investment options selected.